Options 3: Put Options
Put Options
Put options give an investor he right (but not the obligation) to sell
a quantity of shares at a fixed price for the duration of the option up to date
of expiration. The put option cosists of three variables:
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The underlying stock;
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The Expiration Date; and
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The Strike Price.
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As an example, let’s say a investor in the US wishes to obtain the right to sell Let’s say this takes |
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In order to sell this option the investor would pay an option premium which
is determined at market price, lets say it was $3 per share, and since this is a
US option contract there would be 100 shares in the contract and therefore the cost of each option contract would be $300.
Purchasing this option will allow the investor the right to sell 100 shares of YHOO
stock for $45 at any time up to the expiration date regardless of the market
price of the stock. Therefore if the market price goes down to say $25, the investor can
buy stock on the open market and exercise his option and sell the stock back at
the strike price of $45, and pocket the profit of $20 per share or $2,000 per contract.
Alternatively the investor may wish to sell the option back to the market to close
his/her position rather than exercising it for stock, in which case the option premium
will now have risen dramatically since the option is what is known as In The
Money, i.e. the strike price is lower than the underlying stock price
and therefore it has intrinsic value. The investor can sell the
option back to the market at any time before expiration and profit from the rise
in the option premium.